Play a bullish gold outlook while reducing risk

Options Strategy

Question: How can you play a bullish gold outlook while reducing the risk of an uncertain and volatile marketplace?

Answer: A bull 1x2 call spread.

Athough the presidential election will be settled by the time you read this, there still will be a lot of uncertainty regarding the economy and volatility in the metals sector.

Efforts to discern what the next few weeks or months may hold, while always difficult, have been intensified by the recent uptick in realized volatility. Oscillations are exacerbated by program trading, polling data, central banks, jobs numbers and questions regarding the fiscal cliff.

President and General Dwight D. Eisenhower said: “In preparing for battle, I have always found that plans are useless, but planning is indispensable.”

While we are traders, not soldiers or politicians, Eisenhower’s statement rings true. Absent a plan, you are more likely to fail in whatever you do, so here is some background and a plan for trading metals in the coming weeks.

On Nov. 2, the Bureau of Labor Statistics (BLS) reported that the economy added 171,000 jobs in October, beating expectations by about 40k. The BLS also revised the August and September data considerably higher (50k and 34k respectively). The release caught a fairly directionless short-term metals market flat-footed.

The board was blood red on the number as traders pushed gold lower by $40, 2.35%. Silver sold off by $1.39, 4.3%. The week ended in fairly classic “risk-off” fashion with the U.S. dollar and the VIX higher, and just about the entire commodity complex closing at or near multi-week lows.

The weakness in metals may present attractive entry points as the market nears the end of a healthy correction where outside forces still are very supportive of higher prices.

While the election is days away as of press time, the results will not change the overall outlook that higher prices are likely into the end of the year.